David Cameron has said there is a moral duty to cut tax and in the process reveals, yet again his lack of understanding of tax, morality and the economy.
Tax is an economic tool. That is all. Let's not overstate its importance, however excited I get about it. And, like all tools, the only question that can be asked of it is whether or not it is being used to do the right job, in the right way at the right time. The morality of tax comes from answering that question. Tax itself is as neutral as money is in itself: it's how it is used that matters.
It may come as a shock to many, including David Cameron, to realise that tax is a massively multi-facetted tool. What is more, he might even be even more shocked to realise that the primary purpose of tax is not to pay for government spending, and yet his comments clearly reveal that he thinks this is the case. So before it can be decided whether or not tax is moral the uses of tax have to be explained. There are at least five of them.
The first is to redistribute income and wealth because markets create inequalities that are harmful to the economic well-being of those who suffer them and to economies as a whole by reducing overall effective demand. This is a moral purpose as well as an economic one.
Second, tax can and should be used to correct market imperfections; that is the externalities that markets fail to price. In itself this is a moral purpose that seeks to overturn the amorality (at best) of market outcomes.
Third, tax is, and has to be, used to rebalance the economy. This is where fiscal policy comes into play, especially in an era of low interest rates. The simple fact is that whatever some economic theory says markets do not create optimal economic outcomes and governments need to intervene to meet economic objectives that are both desirable and possible, such as high levels of employment. It can do this by counter-cyclical economic spending that deliberately injects money into the economy to boost economic activity for the benefit of everyone — including (and perhaps, most especially) business when business will not do it for itself. This intervention is a moral act.
Fourth, tax raises democratic representation. Put bluntly, people vote because tax matters to them but the result is that we get government that is held to account by those in whose name it acts. That is a profoundly moral act..
And finally, tax is about raising money. But let's be clear: this exercise is actually reclamation of what the government has already spent into the economy through its commitment to fulfill a democratic mandate. The reality is that spending always comes first and tax reclaim comes second. There are three points of explanation to note.
First, governments can, and always have, spent before they have tax revenues because they can create new money. But this is important: the government needs to create money to provide economic stability to any economy.
Second, that spending is not predicated on having tax revenues available. The QE programme, and the effective cancellation of government debt it has given rise to proves that: deficit spending can be cleared without taxation.
And third, this makes clear that there is a fundamental relationship between tax and monetary policy as well as tax and fiscal policy. Treating tax as an administrative, technical or micro-economic issue, as David Cameron very largely seems to do is, as a result, to fundamentally misunderstand its nature and significance that leads to the promotion of policies that are politically and economically implausible, at best.
Four of these five reasons for tax are essentially moral. Cameron's argument can only relate to the fifth, essentially marginal use of taxation, which is its role in reclaiming the spending government makes as a way of ensuring best economic balance within a country.
So Cameron's argument is wrong. It is based on a fundamental misunderstanding of what tax is and it is based on the idea that a government can only spend when it has raised money. I'd say the first moral imperative of engaging in debate, let alone of being Prime Minister, is to know what you're talking about. Cameron has failed this test.
But he's also wrong about tax. Most uses of tax are inherently moral. In that case you can't say there is a moral imperative to cut tax: rates and uses of tax are not independent and those uses and rates are dependent upon need, which requires moral judgement. Cameron is, very simply wrong.
Finally, even total tax collection is independent of spending because it is vital, if the economy is to be managed for the benefit of everyone and not just those who the market favours, that these two issues are not related because if they are we deny government the right to intervene in the economy - and there's nothing more immoral than that.
Which is my point: Cameron's call is profoundly immoral. It's immoral either because he does not understand what he's saying. Or it's immoral because what he is saying he will cut tax without care for the consequence. And that's deeply immoral.
We deserve better moral debate on tax than that.
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In what way is Cameron’s declaration of a moral duty to cut taxes as a way of giving back money to people and families – no matter how deceitful or improbable – any different to Thatcher’s infamous claim, ‘And, you know, there is no such thing as society..There are individual men and women, and there are families.’?
It is simply a restatement
I’ve inserted “Pound(s)” where there should be “Dollar(s)” This excerpt is from J. D. Alt’s “Diagrams and Dollars”. See the link at the end of this comment.
Tax revenue is destroyed.
“Why would the Sovereign Government destroy the tax it collects? Doesn’t it need those tax revenues to pay for its spending? No.
The reason is the underlying reality of what a Pound actually is: It is simply a promise, by the sovereign government, that it will accept the Pound as payment for a Pound’s worth of taxes. That’s it.
A Pound–whether it’s a paper Pound or an “electronic” Pound–is nothing more than that promise. The sovereign government doesn’t promise to exchange a Pound for gold or silver, or for anything else of intrinsic value. It promises only to accept the Pound in exchange for the cancellation of a Pound’s worth of taxes due. In other words, a Pound is the I.O.U. of the sovereign government. The Pound says: “I owe you one Pound’s worth of tax credit.””
http://neweconomicperspectives.org/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html
Robert
I’m sorry if I’m being thick but I don’t understand that argument at all.
Firstly, it could only work if the Govt was the sole creator of money, but we know that banks create far more money than the Govt.
Secondly, a Govt that didn’t tax but simply paid for its spending by issuing more money would completely risk devaluation of the currency. My recollection is that they did this in medieval times when a war/crusade would be paid for by bringing in as much metal as could be arranged & smelting it down for coins. The Kings then started clipping coins, further devaluing the currency. It never ended up well &, in the case of Charles 1, it ended up as badly as could have been contemplated.
Thirdly, even if the Govt could meet all its needs by just printing money it wouldn’t in any way address many of Richard’s points. You can produce 20 tabs for about 20p but we, as a society, want smoking to be much more expensive. The cost of getting petrol out of the ground doesn’t begin to reflect the cost the world incurs when people use it & the result is global warming etc.
Banks do create money, but ‘bank’ money can’t actually be used to pay taxes. For the simple reason that the Government will only accept it’s own sovereign (‘state’) money in payment for taxes. All money is just an IOU, and though ‘bank’ IOUs are more acceptable than that informally created say by an individual, neither can be used to extinguish a tax.
Richard isn’t arguing that there should be no tax. Tax is still needed to stop the currency devaluing – indeed the very fact that sovereign money is the sole means by which sovereign tax is paid (nothing else will do) is what gives it value in the first place.
Agreed
Also worth recalling that bank money is created, in effect, under state licence
In a democracy there will never be total agreement on where the balance of taxation and government spending should be set. There isn’t just one balance point – mathematically there is an infinite number.
So from a right wing perspective how should the balance be shifted away from government? The right always get it wrong by starting off with spending cuts which does nothing apart from sending the economy into a downward spiral.
Firstly, they need to recognise that all money that is earned in the private sector in the UK originates from government spending. If it doesn’t it must be counterfeit.
Secondly, they need to take into account the question of taxation revenue. In a closed economic system where no-one saves their money, spending and revenue have to balance regardless of the level of taxation.
If taxation is set too high the number of transactions to recoup the amount spent will be too few to fully engage the capacity of the private sector. Therefore if it is wished to stimulate the private sector, to create higher profits, extra jobs and generate higher wages, it is taxes rather than public spending which needs to be cut. The revenue received will not fall due to the increased activity in the economy.
Reducing taxes could however generate higher than acceptable levels of inflation , but only if it is overdone. Then would be the correct time to reduce government spending to bring that back under control.
What David Cameron is really saying is “there is a moral duty to destroy public services and the social security system”. Which is what his policies imply, and that’s what he wants of course, so that more money can be funnelled upwards to the 1%. If the Labour Party had any idea whatsoever they would point this out but they are completely useless, of course.
What’s really worrying is that some of them even know what they are doing is useless
The labour party seems to engaged in a large scale and perverse ‘Auto-da-fe’ which is very hard to explain. It gets worse week after week. Only psychopathology can explain this. It has even been recently revealed that Miliband silenced the Party’s response to the Bedroom Tax to allow time to judge the perceived vox populi. See: http://www.theguardian.com/politics/2014/oct/25/johann-lamont-quits-scottish-labour
Quite incredible and fantastical!
Really good MMT-consistent points Richard. Well said.
Will Hutton in The Guardian also calls out Cameron’s immorality on taxation…
http://www.theguardian.com/commentisfree/2014/nov/02/david-cameron-is-immoral-not-our-tax-system
Its a very good article, but what a pity that Will, like so many progressives, is unaware of his own ‘economic illiteracy’ – one that plays right into Cameron’s hands – when he claims “we pay our taxes to fund..”.
Taxation has many purposes, which you outline, but funding isn’t one of them.
Agreed
I think Milliband is in a quandary. The Blairites keep going on that he needs to appeal to “the centre ground” which, essentially, means appealing to the worst instincts of white, lower-middle-class people in Essex.
Actually, he doesn’t. What we saw from Scotland is that the 50-60% turn-out we associate with elections isn’t necessarily so. If people really feel motivated you can get a 80-90% turn-out.
I’ve said this before. About 8 years ago the BNP looked like winning a seat in one of the Lancashire by-elections & were defeated by a massive turn-out, like 80% or more. Its wrong to say people are apathetic, people, white, black, asian, mixed are fed-up & sick of being lied to. Give them a positive message (as the SNP did) & they will stir themselves from their sofas & vote. Promise them more identical party nominees & they will, not unreasonably, decide that curling up on the sofa watching “Peaky Blinders” beats trudging out to vote for a monkey in a different rosette any time.
Agreed